Payment Systems in India

Large payments, micro payments, online payments, credit card payments…payments in general are what makes the world go around. In most mature markets the issuance of new physical credit cards has reached a saturation point. Instead consumers are looking towards newer technologies such as near field communications (NFC) to allow their mobile phone to transact a payment at a retailer. It’s pretty clear that the smart phone will become your wallet and it completely makes sense. If you lose your physical wallet you have to go through the hassle of calling all your banks and canceling your credit cards. However, if your smart phone has a password on it, then your biggest worry is which new awesome sauce phone you will buy to replace the lost one.

In emerging markets like India, the use of a credit cards never really took off because of various reasons – no credit rating system, slow legal process to go after defaulters and a large percentage of people that are not “economically viable” for credit card companies. However, it’s becoming clear that as more people open bank accounts they will want to transact and most will opt for their smart phone and not a credit card to make payments..sorry Visa and MasterCard.

Before we continue let’s run through the various payment systems available in India today:

1. Real Time Gross Settlement (RTGS) is run by the Reserve Bank of India (RBI). It deals in high value and high volume, most widely used in India.

2. National Electronic Funds Transfer (NEFT) is also run by the RBI. NEFT is more retail in nature and includes large volume but not in value. It’s a batch system and thus not real-time.

3. Immediate Payment Service (IMPS) was created by the National Payments Corporation of India (NPCI). It’s a mobile phone payment service.

4. RuPay was created by NPCI and is similar to other cards networks like Visa and MasterCard. It’s India’s own cost effective credit/debit card network.

5. Aadhaar Enabled Payment System (AEPS) was developed by NPCI in association with the UIDAI, who is in charge of the Aadhaar national identity program. It will allow for payments between Aadhaar members.

There is a lot of activity in the payment space and it’s clear by looking at the above list. Personally, I think IMPS will end up dying since setting it up is a major pain in the ass and thus most retail customers will opt for NEFT. For India to implement RuPay would be a huge win and it would bring down the transaction costs for credit cards which are currently around 3%. However, I can see Visa and MasterCard doing everything in their power to make sure RuPay never becomes commercially viable. China has their own credit card called UnionPay and it is the largest credit card issuer in the world. China has the will and ability to implement large scale projects and I believe that is where India may stumble and give in to Visa and MasterCard.

But most interesting is AEPS, as more of the population gets an Aadhaar number (India’s equivalent of a social security number) it will allow 100’s of millions of people to make payments. Remember many of these people getting an Aadhaar card never had a bank account and now are becoming part of the banking system. Teamed up with a smart phone they can now transact via their phone whereas before all their payments were made in person. The perfect storm of – low cost payment systems, national identity card and smart phones will create a whole new market for many startups and allow commerce to flow easier in India.